Big-bank containment strategy catches on in US, EU

By Reuters Staff
November 3, 2009

By Kevin Drawbaugh
WASHINGTON, Nov 3 (Reuters) – The government should be able to restrict the size of financial firms so they do not become “too big to fail,” two key U.S. Democratic lawmakers said on Tuesday, echoing proposals being made in Europe.

Representative Barney Frank, chairman of a key U.S. congressional committee, told reporters that regulators could step in and reduce the size of troubled financial firms under a systemic risk oversight bill being debated by the panel.

Earlier, Representative Paul Kanjorski, chairman of the House of Representatives capital markets subcommittee, told reporters he would soon introduce a measure to prevent firms from getting so large that they threaten the wider economy.

“We are preparing an amendment to give authority to reconstruct organizations that are determined to be too large to fail,” Kanjorski told reporters.

“We have to find a way to limit them from becoming too big to fail so they don’t capture the government.”

In a possibly sweeping assertion of government power over the financial industry, the idea of keeping mega-firms to a manageable size is spreading on both sides of the Atlantic.

As lawmakers thrash out ideas for tightening bank and capital market regulation following the worst financial crisis in decades, bankers raised the alarm.

Cutting big international banks down to size would not solve the problems highlighted by last year’s crisis, Deutsche Bank Chief Executive Josef Ackermann told a regulatory conference in London on Monday.

“Size is not an end in itself and it is not necessarily evil either,” said Ackerman. “The refragmentation of financial markets is in nobody’s interest.”

DELAYS IN HOUSE
The U.S. lawmakers’ comments came as Frank announced significant delays in consideration of the systemic risk bill by the House Financial Services Committee, which he chairs.

Instead of voting this week on the bill as planned, the committee is targeting mid-November. A vote by the full House may not come until early December, he said.

That would be two to three weeks later than planned, likely killing any chances that Congress will finish dealing with the Obama administration’s financial reform proposals this year.

As the House debated, an aide to U.S. Senate Banking Committee Chairman Christopher Dodd said on Tuesday he could release a draft financial reform bill as soon as next week.

The bill could be debated and possibly voted on “in full committee as early as the week of November 16,” Dodd spokeswoman Kirstin Brost told Reuters.

The financial regulation reform debate has intensified in recent days in Washington and in the European Union, more than a year since the collapse of former Wall Street giant Lehman Brothers triggered a severe credit crunch.

The massive taxpayer bailouts that followed — of firms ranging from AIG to Citigroup — created a political hornet’s nest for lawmakers, angering voters while simultaneously suggesting to markets that a handful of elite financial firms could now be considered “too big to fail.”

The two largest UK retail banks — Royal Bank of Scotland and Lloyds Banking Group — secured more government aid on Tuesday and agreed to sell branches and businesses to appease EU competition concerns over state aid.

EU regulators are considering measures to force banks across Europe to sell assets and sometimes even to break up to compensate for massive state aid they have received.

The G20 group of countries have agreed that large banks whose failure could destabilize markets should have contingency plans on file for speedy wind downs in case of emergency.

They should also be subject to tougher capital rules, with the aim of tackling the “too big to fail” issue and lessening the need in future for huge government bailouts, the G20 said.
(Additional reporting by Rachelle Younglai and Karey Wutkowski, with Huw Jones, Clara Ferreira-Marques and Steve Slater in London; Editing by Simon Denyer) ((kevin.drawbaugh@thomsonreuters.com, +1 202 898 8390, +1 202 488 3459 (fax))) Keywords: FINANCIAL REGULATION/

No comments so far

We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/